It seems that Venezuela’s dictator Nicolás Maduro has finally found the way to bring the country out of the unprecedented economic crisis Venezuela is immersed in since 2012. The ineffable leader of the Bolivarian Revolution has recently announced the launching of a new currency, the so-called Sovereign Bolivar, which will replace the bolivar as the official medium of exchange starting in June.
The announcement was made via Twitter, where Maduro said that the current bolivar will be demonetized (cease to be legal tender) in favor of the new currency. The truth is that the bolivar was de facto demonetized a long time ago by the market due to the irresponsible monetary policy (basically, printing money to fund budget deficits year after year) undertaken by the Central Bank of Venezuela, fully controlled by the Bolivarian government.
But what’s so special about this new currency that is expected to solve the worst economic crisis that Venezuela has experienced in the last decades? Simple: it removes three zeros from the current bolivar. In other words, 1,000 current bolivars will become 1 sovereign bolivar. According to the Venezuelan authorities, this will help fight inflation, a first step towards fixing the deteriorated economic situation of the country. But will it?
The Economics of the Situation
Let’s take a look at economic theory. Like the demand for other goods, the demand for money depends on the utility economic agents derive from it. When an independent central bank promises to deliver a common-sense monetary policy aimed at, for instance, stabilizing the price level, people will demand that currency because of its usefulness as a medium of exchange and store of value. However, when a central bank irresponsibly inflates its currency due to political pressures, prices end up skyrocketing and consumers and investors cease to use it, shifting to other currencies or commodities that better meet their necessities.